CFPB Proposes Anti-Arbitration Rule

On May 5, 2016, the CFPB issued a proposed rule prohibiting financial service companies from using mandatory arbitration clauses as a way to block class action lawsuits in new contracts. Millions of contracts for consumer financial products and services contain arbitration clauses that require consumers to resolve their disputes through the arbitration process instead of the court system. The proposal is expected to take effect next year after a 90-day public comment period and the publication of a final rule.

The proposed rule would apply to most consumer financial products and services that the CFPB oversees, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, student loans, and installment loans. The CFPB has already barred mandatory arbitration clauses in most residential mortgages and home equity loans.

The CFPB was required by the 2010 Dodd-Frank Act to study the use of arbitration clauses in consumer financial markets and was authorized to address any issues it found by writing new regulations. The resulting March 2016 “Arbitration Study,” found that arbitration clauses restrict consumers’ relief for disputes in connection with consumer financial products or services. According to the CFPB, class actions are successful at bringing an average of at least $220 million in relief to millions of consumers each year and cause companies to change their questionable behavior.

The CFPB proposal would not ban arbitration clauses outright. The proposed rule only “would prohibit providers from using a pre-dispute arbitration agreement to block consumer class actions in court and would require providers to insert language into their arbitration agreements reflecting this limitation.” The regulation would preserve mandatory arbitration clauses for individual disputes. However, the prohibition on the use of arbitration clauses to block class actions could lead companies to stop offering arbitration completely. This is because companies might choose to stop subsidizing arbitration fees in light of an entirely new cost-benefit analysis.

The proposed rule would also require companies that use arbitration agreements to submit certain information to the CFPB regarding each arbitration conducted under the agreements covered by the rule. The CFPB intends to use the information it collects to monitor arbitration proceedings and to determine whether any further action is necessary to protect consumers. The CFPB also intends to publically publish these materials on its website in some form in the future.

To facilitate implementation of the new rule, the proposal includes contractual language that companies would be required to put into their agreements stating as follows: “We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”